Strategic Sourcing is commonly tied to cost cutting. It is important to note, however, that while increasing company value by cutting costs is an aspect of strategic sourcing, it is only one of many ways strategic sourcing is capable of increasing the value of a company.
For some companies, spending money can increase the value of an organization just as much as not spending it. The trick is to spend the money wisely. This was not the case for Carnival Cruise Lines, who chose to defer spending additional funds on much needed maintenance for its ships and is now paying for it. In recent years Carnival has been embroiled in various difficulties with its ships. In 2013 alone, the company had three major incidents where ships malfunctioned due to lack of proper maintenance. Because of the numerous incidents involving cruise ships, Senator Charles Schumer, introduced legislation to protect consumers from neglectful cruise lines, titled “The Cruise Ship Bill of Rights.” The legislation calls for six rights that must be provided on each cruise ship, including the right to a full refund for a trip that is abruptly canceled due to mechanical failures. The highly publicized breakdowns caused terrible damage to Carnival’s reputation. In order to restore consumer confidence, Carnival is now offering deep discounts to individuals (As low as $35 a night) and free cruises to travel agents. Combined with the company’s expenses in meeting the Bill of Rights provisions, this will undoubtedly decrease future profits.
Deferred maintenance programs are nothing new. Various local, state, and federal government entities use deferred maintenance programs as a way of cutting costs to come under budget for a particular fiscal year or quarter. In response to this phenomenon, the U.S. Army Corp of Engineers conducted a study regarding issues in deferred maintenance programs. The study concluded that, although deferred maintenance is a viable solution for cost reduction, deferred maintenance programs must be done under strict supervision so that essential resources receive proper and timely maintenance.
Carnival’s decision to save money in the short term by deferring to spend money on maintenance, has led to a greater loss of revenue than the savings achieved from the cuts.